Future Taxable Amounts

• An assumption inherent in a company’s IFRS SoFP is that companies

recover and settle the assets and liabilities at their reported amounts
(carrying amounts).
• This assumption creates a requirement under accrual accounting to
recognize currently the deferred tax consequences of temporary
differences.
• That is, companies recognize the amount of income taxes that are payable
(or refundable) when they recover and settle the reported amounts of the
assets and liabilities, respectively.
• The following illustration shows the reversal of the temporary difference
described in above and the resulting taxable amounts in future periods
 Accounting for Income Taxes
• Circumstances dictate whether a company should add or
subtract the change in deferred income taxes to or from income
taxes payable in computing income tax expense.
• For example, a company adds an increase in a deferred tax
liability to income taxes payable.
• On the other hand, it subtracts an increase in a deferred tax
asset from income taxes payable.
 Accounting For Income Taxes
• Specific Differences : Numerous items create differences between pre-tax
financial income and taxable income.
• Temporary Differences
• Taxable temporary differences are temporary differences that will result in
taxable amounts in future years when the related assets are recovered.
• Deductible temporary differences are temporary differences that will
result in deductible amounts in future years, when the related book
liabilities are settled.
• Taxable temporary differences give rise to recording deferred tax liabilities.
• Deductible temporary differences give rise to recording deferred tax assets
 Revenues or gains are taxable after they are
recognized in financial income (deferred tax liability).
• An asset (e.g., accounts receivable or investment) may be recognized for
revenues or gains that will result in taxable amounts in future years when the
asset is recovered. Examples:
1. Sales accounted for on the accrual basis for financial reporting purposes and
on the instalment (cash) basis for tax purposes.
2. Contracts accounted for under the percentage-of-completion method for
financial reporting purposes and the cost-recovery method (zero-profit
method) for tax purposes.
3. Investments accounted for under the equity method for financial reporting
purposes and under the cost method for tax purposes.
4. Gain on involuntary conversion of non-monetary asset which is recognized for
financial reporting purposes but deferred for tax purposes.
5. Unrealized holding gains for financial reporting purposes (including use of the
fair value option) but deferred for tax purposes.
 Expenses or losses are deductible after they are recognized
in financial income (deferred tax asset).
• A liability (or contra asset) may be recognized for expenses or losses that
will result in deductible amounts in future years when the liability is
settled. Examples:
1. Product warranty liabilities.
2. Estimated liabilities related to discontinued operations or restructurings.
3. Litigation accruals.
4. Bad debt expense recognized using the allowance method for financial
reporting purposes; direct write-off method used for tax purposes.
5. Share-based compensation expense.
6. Unrealized holding losses for financial reporting purposes (including use
of the fair value option) but deferred for tax purposes.
 Revenues or gains are taxable before they are recognized in
financial income (deferred tax asset).
• A liability may be recognized for an advance payment for goods or services to be
provided or performed in future years.
• For tax purposes, the advance payment is included in taxable income upon the
receipt of cash.
• Future sacrifices to provide goods or perform services (or future refunds to
those who cancel their orders) that settle the liability will result in deductible
amounts in future years. Examples:
1. Subscriptions received in advance.
2. Advance rental receipts.
3. Sales and leasebacks for financial reporting purposes (income deferral) but
reported as sales for tax purposes.
4. Prepaid contracts and royalties received in advance.
 Expenses or losses are deductible before they are
recognized in financial income (deferred tax liability).
• The cost of an asset may have been deducted for tax purposes faster than it
was expensed for financial reporting purposes.
• Amounts received upon future recovery of the amount of the asset for
financial reporting (through use or sale) will exceed the remaining tax basis
of the asset and thereby result in taxable amounts in future years.
Examples:
1. Depreciable property, depletable resources, and intangibles.
2. Deductible pension funding exceeding expense.
3. Prepaid expenses that are deducted on the tax return in the period paid.
4. Development costs that are deducted on the tax return in the period paid
 Specific Differences
• Determining a company’s temporary differences may prove difficult.
• A company should prepare a statement of financial position for tax
purposes that it can compare with its IFRS statement of financial position.
• Many of the differences between the two statements of financial position
are temporary differences.
 Specific Differences
• For example, assume that Sharp Co. has tax depreciation in excess of book
depreciation of $2,000 in 2013, 2014, and 2015.
• Further, it has an excess of book depreciation over tax depreciation of
%3,000 in 2016 and 2017 for the same asset.
• Assuming a tax rate of 30 percent for all years involved, the Deferred Tax
Liability account reflects the following: refer page 966.
• The originating differences for Sharp in each of the first three years are
$2,000.
• The related tax effect of each originating difference is $600.
• The reversing differences in 2016 and 2017 are each $3,000.
• The related tax effect of each is $900.
 Specific Differences
• Permanent Differences
• Some differences between taxable income and pre-tax financial income are
permanent.
• Permanent differences result from items that:
1) enter into pre-tax financial income but never into taxable income, or
2) enter into taxable income but never into pre-tax financial income
▪ Governments enact a variety of tax law provisions to attain certain political,
economic, and social objectives.
• Some of these provisions:
✓exclude certain revenues from taxation,
✓limit the deductibility of certain expenses, and
 Specific Differences
✓permit the deduction of certain other expenses in excess of costs incurred.
• A corporation that has:
✓tax-free income,
✓non-deductible expenses, or
✓allowable deductions in excess of cost
• has an effective tax rate that differs from its statutory (regular) tax rate
• Since permanent differences affect only the period in which they occur,
they do not give rise to future taxable or deductible amounts.
• As a result, companies recognize no deferred tax consequences